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How to make a better Will

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Friday August 9, 2013 at 4:31pm
Following on from my blog last week about the importance of making a proper Will, to protect your wealth for your family, this week and next I want to explain why the usual ‘mirror wills’ might not be the best solution.

Mirror Wills for married couples are the most common type of estate planning. The Will is written to leave all of the estate to the surviving partner on first death and then on second death it passes to the children in equal shares. This sounds sensible and for most people it seems to reflect what they would like to happen with their accumulated wealth when they die. However, if you are married and your combined estate is worth over £325,000 you should consider a slight adjustment to this approach and look at incorporating a trust into your Will.

If you have a simple mirror Will all of your estate will pass to your spouse. If you have a Will trust written into your Wills, then on first death £325,000 will pass into your trust which is created by your Will on death.

It may sound complicated but it is not, your surviving spouse still has access to the £325,000 now in trust and so they are not disadvantaged. However, at a stroke you have just provided your partner and children with the following benefits:

Save £130,000 in inheritance tax

Each spouse has a nil rate band of £325,000 and any amount unused on first death of a married couple can be transferred to the second spouse’s estate when they die. However, the transfer of this unused nil rate band must be claimed from HMRC. Importantly it needs to be supported with evidence of assets and financial records from the 7 years prior to the first death up to the date of the second death. The onus to produce this information is up to the Executor and in many cases such evidence to support the claim will not be forthcoming.

Writing the trust into the Will avoids the need to make this claim and safeguards the use of the former spouses’ £325,000 exemption automatically. At 40% tax rate this is worth £130,000 in saved tax.

Protect the inheritance from care home fees

If any member of a couple is going to go into local authority care it is usually the surviving spouse. The reason being: there is no one left to look after them. Often most of their wealth is used up by care home fees, including the assets passed on by their former spouse.

With the trust written into the Will at least £325,000 of assets belong to the trust and so are not available for local authorities to take to cover care costs. This then leaves £325,000 available for children rather than going to the local authority.

Keep assets safe for children

You may read in the papers how unintended consequences allow a parent’s wealth to pass to someone else’s children rather than their own. This happens when a spouse dies and the remaining one remarries. They inherit all their former partners’ wealth and all is well. However, they may then decide not to use any of this inherited money to help their children. Alternatively they may die and their new spouse inherits all of this wealth.

In both of the above scenarios the children of the first marriage do not benefit from the deceased parents estate. By leaving assets in the Will in trust with the children and spouse as beneficiaries you are safeguarding those assets for the benefit of your children even after you are gone.

Next week I will explore additional reasons to write a trust into a Will, but if in the meantime if you are interested to learn how this type of estate planning can help you, please contact me.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here